On his radio show today, Dennis Prager talks to John Mauldin, renowned financial expert and analyst. His free weekly e-newsletter, Thoughts from the Frontline, has over a million subscribers. His new book, already a best seller, is Endgame: The End of the Debt SuperCycle and How It Changes Everything…
Dennis: “The [housing crisis and recession] was caused by banks being coerced into giving sub-prime loans to people who could not afford them.”
John: “No. Banks weren’t coerced into it. They willingly greedily leapt into that process. Starting with local mortgages to the people in Europe and Asia buying those bonds, there was greed involved… Mortgage bankers, investment bankers, got bonuses [for the superior earnings that came with investing in risky bonds]. The Fed kept rates too low for too long. The ratings agencies were supposed to be the adults supervising the sandbox. There was nobody supervising the sandbox. The ratings agencies, for all intents and purposes, were handing out fake IDs at an underage teenage drinking party.”
Dennis: “The CRA?”
John: “That was a minor part. Greed was the issue.”
Dennis: “Human greed was in existence since Adam. The CRA was new.”
John: “You had investment bankers who could buy crap and sell it and make a 1.5% spread. Those are huge bonuses. And you could do that every week.”
Dennis: “Why did it begin when it began?”
John: “Low rates. Pensions and investors started reaching for yield. It was the confluence of a lot of things. The list of culprits is three pages long. We didn’t learn our lessons. We still haven’t put derivates on an exchange. My biggest worry is a European bank crisis affecting the U.S. Our banks have sold so many trillions of dollars of derivatives that look like they’re balanced but that derivative is only as good as the counter-party.”
